Reinvestment assumptions are different under each method of ranking capital projects.

Question

Quizplus · Accepted Answer

Different methods of ranking capital projects have different assumptions about when and how much of the project's cash flows will be reinvested back into the project. For example, the Internal Rate of Return (IRR) method assumes that all cash flows are reinvested at the project's IRR, while the Modified Internal Rate of Return (MIRR) method assumes that cash flows are reinvested at a different rate, usually the cost of capital. These different reinvestment assumptions can result in different rankings of capital projects.

Reinvestment Assumptions Are Different Under Each Method of Ranking Capital